Krugman being Krugman

[badlydrawnjeff.livejournal.com]

"There's the great line, of course, about how his "lived experience" (see? I told you, he's doing empirical work!) confirms that motivated cognition "is not, in fact, symmetric between liberals and conservatives.

...

That Krugman is too thick to see that one can't infer anything about the quality of partisans' reasoning from the truth or falsity of their beliefs is ... another element of Krugman's proof that ideological reasoning is symmetric across right and left!"

Comments

[peristaltor.livejournal.com]

Uhhh. Speculation has nothing to do with reserve requirements. Return on investment has nothing to do with reserve requirements.

Wrong! See below.

. . . . if the sum of deposits is larger than the reserve ratio multiplied by the reserve amount (or divided whichever) then they cannot make that loan without increasing their reserves.

*Sigh* Son, I know that. I know all of this. Now then, let's think a bit. You said in there: "This is a simple accounting identity wherein on one side is the deposit and on the other side is the loan." And this turns out to be the key.

Let's go back to the Great Depression. In the Pecora Report, the authors noted that up to 2/3rds of banks in one section of the country (I could look it up in the report, if you need) went insolvent because of loans made to officers in the banks. Unsecured loans. Loans made specifically to invest in speculative ventures. This went on for years. When the crash came, the borrowers were (of course) unable to pay back those loans, leading to the insolvency of their hiring bank. In many cases, also according to the report, borrowing officers were still employed by the surviving banks, even after their personal defaults.

How could this have happened? Like I said above, in speculation "returns get larger than when banks lend on traditionally 'good collateral' like a crop brought in for harvest," especially in an overheating economy where new loans are directed to overheating elements. If the lending officers and owners have a few years where speculative investments pay off, they will back loans for future speculative investments. Here's the kicker: they don't need the fed or any other authority for permission. As long as the speculation out-performs the proscribed interest rate, the loan will be profitable . . . at least until they aren't.

Speaking of that interest rate, banks that are well-capitalized don't need to worry about borrowing from the Fed. They are under no obligation to even listen to the Fed rate if they can lend profitably. So as long as the inflation rate seems to match the rate of economic activity and employment, the Fed itself (especially under an idiot-savant ideologue like Greenspan, who was also clueless about what the rescinding of Glass-Steagall had wrought), there is no reason for the Fed to crank up the interest or reserve requirements.

How about what happened more recently? Backing lending were assets. I'm sure you know that assets as well as hard currency can back lending, right? Provided they were highly rated—easy, since the ratings agencies were, as Michael Lewis mentioned, just about clueless as to what was happening and thus easily manipulated, never mind the conflict of interest inherent between an agency paid by the entity needing a good rating—assets on the bank books promising the steady return of hard currency to the vaults was as good as gold, literally, for the balance sheets to accept increasing the loan exposure. And among those triple-A rated "assets" were derivative contracts, literally bets placed on completely different assets succeeding. Sometimes, as we learned in the wave of crashes and closures, these derivatives were multi-leveled, meaning they were bets on the success of bets betting on the success of bets placed on a hard asset like a loan. One loan, paying off (again, according to the reporting) up to nines times on a single asset, basically multiplying that asset's value nine fricking times with no underlying change to the wealth of the economy!

(cont.)